CONTRIBUTORS
Michael Clarfeld, CFA
Portfolio Manager
ClearBridge Investments
Key takeaways
- A quick survey of global equity performance shows that not only did US equities become worth less in the first six months of 2025, they also significantly underperformed global markets. Despite such underperformance, they continue to trade at a record premium to foreign markets.
- With US markets at all-time highs, foreign markets relatively cheaper than they have ever been and global investors over-indexed to US markets, it is easy to envision cascading outflows.
- With inflation expectations becoming entrenched and stagflation a growing concern, we believe diversified portfolios of high-quality dividend growers as especially attractive, with real assets in particular one of the few safe havens relative to the overall market.
US investors must not become complacent
When I reflect on year-to-date performance, I feel like pinching myself. Despite trade wars, battlefield wars and deteriorating fiscal policy, the US market rose in the first half. Stocks really do climb a wall of worry.
Investors looking at their June statements must feel good—unless they live outside the United States. While US investors saw a 6.2% return year to date, the S&P 500 Index is down in most foreign currencies due to the significant decline in the US dollar (Exhibit 1). S&P 500 investors in Japan lost 1.2% in yen; in euros that would be a 5.3% loss; while the S&P 500 declined 16.4% relative to gold. Indeed, the dollar is the only commonly used yardstick that flatters US returns.
Exhibit 1 S&P 500 Performance by Currency (December 2024-June 2025)
Sources: ClearBridge Investments, Bloomberg Finance. As of June 30, 2025. Past performance is not an indicator or a guarantee of future results.
A quick survey of global equity performance drives home the point. Not only did US equities become worth less in the first six months of 2025, they also significantly underperformed global markets (Exhibit 2), with the S&P 500 up 5.5% versus the MSCI ACWI ex US Index’s 17.9%. Yet despite considerable underperformance, US stocks, with a trailing price-to-earnings (P/E) of 23.8x, continue to trade at a record premium to foreign markets, at 15.3x (Exhibit 3).
Exhibit 2: US vs. Global Market Returns
Sources: ClearBridge Investments, Bloomberg Finance. As of June 30, 2025. Past performance is not an indicator or a guarantee of future results.
Exhibit 3: US and Global P/E Ratios
Sources: ClearBridge Investments, Bloomberg Finance. As of June 30, 2025. Past performance is not an indicator or a guarantee of future results.
For US focused investors, it is easy to lose sight of global dynamics. But for foreign investors, these issues are front and center every day. Rising US equity markets may make American investors feel good, but they will not do any good if those investors are unable to maintain and grow their purchasing power. Continued US underperformance also risks becoming self-reinforcing. With US markets at all-time highs, foreign markets relatively cheaper than they have ever been and global investors over-indexed to US markets, it is easy to envision cascading outflows.
Suddenly, those warm and fuzzy feelings about first-half performance seem misplaced.
The S&P 500 currently trades at 22x forward 12-month earnings, a level matched only twice in the last 35 years: in 2021-2022 and in 2000 (Exhibit 4). Investors who put cash to work in those periods lost money over the ensuing 12 months.
Exhibit 4: US and Global P/E Ratios
Sources: ClearBridge Investments, Bloomberg Finance. As of June 30, 2025. On a blended forward 12-month basis. Past performance is not an indicator or a guarantee of future results.
The past is, of course, no guarantee of the future. Artificial intelligence (AI) could prove wondrous, tariff revenues could pay for tax cuts and geopolitics may be the risk that never comes home to roost. But with the demanding odds embedded in current stock prices, are investors sufficiently incentivized to bet that way?
Given all the challenges we face (tariffs, deficits, wars, etc.) and, more importantly, the inherent uncertainty of investing, buyers should demand better. US equities offer little margin of safety. If stocks returned to long-term average multiples, they would be 30% lower than they are today.
Suggesting the market could decline 30% undoubtedly sounds provocative, but is it crazy to suggest the market could trade in line with historical averages? To be bullish today, one must believe the market will sustain levels never previously sustained, rather than trade at the levels it usually trades at. When phrased like that, why would any risk-averse investor bet heavily on the former?
Against such a challenging backdrop, we recommend diversified portfolios of high-quality dividend growers. Touting diversification may sound trite, but diversification today is anything but commonplace. The most well-known benchmarks have become absurdly concentrated, and most portfolios mimic those benchmarks. Concentration leads to increased volatility, but robust dividends can provide an anchor to windward in stormy seas. Valuations for high-quality dividend growers are also, generally, less demanding.
Real assets stand out. With inflation expectations becoming entrenched and stagflation a growing concern, we believe real assets offer one of the few safe havens relative to the overall market. Real assets recoup increasing costs through price increases, while their in-place assets accrete value as replacement costs rise.
We particularly like energy and apartment real estate investment trusts (REITs). Energy companies screen reasonably on current earnings, despite weak commodity prices, and offer torque to rising oil prices. Apartment REITs benefit from higher interest rates and the residual effects of Covid-era inflation. Developers have slashed new projects as costs have increased, while rising mortgage rates keep home ownership out of reach and tenants renting longer. Apartment REITs offer reasonable dividend and cash flow yields, and rising rents are poised to drive earnings growth.
Investors pouring into AI, crypto and everything new remind us of past episodes of complacency and euphoria. Buyers frequently gravitated to the correct companies in those moments yet still walked away disappointed because of the prices they paid. Given the tremendous uncertainty and change we face today, US investors should be relieved with first-half performance; but, given record valuations, record concentration and attractively valued opportunities elsewhere, US investors must not become complacent.
Definitions
The Standard & Poor’s® 500 Index (S&P 500®) is a market capitalization-weighted index of 500 stocks designed to measure total US equity market performance.
The MSCI ACWI ex US is an index that represents the performance of large and mid-cap stocks across all developed and emerging markets, excluding those in the United States.
The price-to-earnings (P/E) ratio measures a company's share price relative to its earnings per share (EPS).
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.
Equity securities are subject to price fluctuation and possible loss of principal. Large-capitalization companies may fall out of favor with investors based on market and economic conditions. Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks.
Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.
US Treasuries are direct debt obligations issued and backed by the “full faith and credit” of the US government. The US government guarantees the principal and interest payments on US Treasuries when the securities are held to maturity. Unlike US Treasuries, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the US government. Even when the US government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically.
Dividends may fluctuate and are not guaranteed, and a company may reduce or eliminate its dividend at any time.
Active management does not ensure gains or protect against market declines.
Investment strategies which incorporate the identification of thematic investment opportunities, and their performance, may be negatively impacted if the investment manager does not correctly identify such opportunities or if the theme develops in an unexpected manner. Focusing investments in information technology (IT) and/or technology-related industries carries much greater risks of adverse developments and price movements in such industries than a strategy that invests in a wider variety of industries.
Risks of investing in real estate investments include but are not limited to fluctuations in lease occupancy rates and operating expenses, variations in rental schedules, which in turn may be adversely affected by local, state, national or international economic conditions. Such conditions may be impacted by the supply and demand for real estate properties, zoning laws, rent control laws, real property taxes, the availability and costs of financing, and environmental laws. Furthermore, investments in real estate are also impacted by market disruptions caused by regional concerns, political upheaval, sovereign debt crises, and uninsured losses (generally from catastrophic events such as earthquakes, floods and wars). Investments in real estate related securities, such as asset-backed or mortgage-backed securities are subject to prepayment and extension risks.
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